if to slam an exclamation point on the urgency of the topic
of financial disclosures, news about the latest in a series
of accounting scandals broke just as the Kellogg School’s
“Credible Financial Disclosures” conference got
underway June 25-26 in Evanston.
Telecommunications firm WorldCom Inc. joined
a growing list of companies that have experienced recent serious
accounting discrepancies, and shocked an already reeling investment
world by reporting nearly $4 billion in disguised expenses.
The news broke while Paul Volcker, former chairman of the
U.S. Federal Reserve, delivered a keynote address to start
the Kellogg conference.
Volcker was one of more than a dozen prestigious legal, financial
and accounting experts — including incoming Financial
Accounting Standards Board chairman Robert Herz and former
Securities and Exchange Commission chairman David Ruder —
providing insights into the recent events in the financial
industry, and suggesting necessary reforms to restore investor
“The concerns extend far beyond the
profession of auditing itself,” said Volcker, an advocate
for significant reforms in such areas as accounting standards,
auditing practices and institutional frameworks to provide
and maintain financial discipline. “There are important
questions of corporate governance…I think we are seeing
the bitter fruit of broader erosion of standards of business
and market conduct related to the financial boom and bubble
of the 1990s.”
Volcker stated that accounting discipline
is “fundamental to the effective functioning of our
market system.” In his address, he highlighted the need
for reform within both the accounting industry and corporate
governance, calling for more rigorous standards and urging
the industry’s lobbyists to work seriously with federal
legislators to restore investor confidence. Historically,
Volcker said, accounting lobbyists have opposed legislation
that would eliminate certain financial incentives.
“There cannot be any point in resisting
change now, not at the expense of further undermining market
confidence,” he said.
Volcker also noted the need for serious review
of CEO compensation, including stock option abuses that he
said “represented a good idea originally but now favor
management, not stockholders” and are frequently used
to reward even poor performance.
“Our goal is not just to devise consistent
accounting standards, but better standards,” said Volcker.
“Without rules, at the end of the day, there can’t
really be a game.”
The two-day conference was sponsored by the
Kellogg School’s Zell Center for Risk Research, the
Kellogg School Accounting Research Center and faculty from
the Kellogg Department of Accounting Information and Management,
including Ronald Dye, department chair and the Leonard Spacek
Professor of Accounting.
Panel discussions addressed such issues as
the role of analysts, corporate governance and legal counsel
in producing credible financial disclosures. Experts also
discussed accounting standards and the role of auditing firms
and ratings agencies.
Panelists, including Lynn Turner, former
chief accountant for the Securities and Exchange Commission,
called for sweeping accounting reforms that produce independent
auditors, analysts and corporate boards. He noted that the
accounting crisis was an international problem and one that
has cost the American public some $5 trillion.
Nell Minow, shareholder activist and former
attorney at the Environmental Protection Agency and Department
of Justice, discussed the importance and proper role of a
firm’s audit committee, and said that these committees
are often filled with people underqualified for the accounting
responsibilities with which they are tasked.
“Auditors must be the first line of
attack to safeguard against lies,” said Minow. “They
need to win back the faith of the American investor, otherwise
everyone will put their money into gold bars.”
Stephen Presser, the Raoul Berger Professor
of Legal History at Northwestern University and the Kellogg
School, offered his critique of the Arthur Andersen court
ruling, suggesting that the government’s handling of
the firm leaves much to be desired. The ruling gives a “new
and terrifying meaning to guilt by association,” said
Presser, who admitted the crisis in financial accounting presents
dire challenges, but he remained suspicious of the efficacy
of legal regulations.
“Exploding Andersen is not exactly a
healthy way to promote healthy competition among the accounting
industry,” Presser said. He suggested that focusing
attention on CEO compensation might prove a more constructive
way to engage the crisis. CEO pay has jumped 535 percent since
1990, while employee pay has increased only 32 percent during
that time, he said.
“I’m no leveler, but something’s
wrong here. These salaries are way out of line with world
standards and may contribute to the argument of those who
would regulate and redistribute wealth,” said Presser.
“Accounting reforms are fine, but the other key is the
behavior of executives and their pay. We no longer require
our leaders to learn the classics or moral philosophy and
Attorney and real estate entrepreneur Sam
Zell offered a frank and more contrarian assessment at the
conference. In a voice reminiscent of George Carlin’s
acerbic delivery, the maverick business leader offered his
historical perspective on the accounting scandals.
“Compared to the crooks involved in
the S&L bailout, these guys [at Enron and WorldCom] are
saints,” insisted Zell. “Admittedly, I’ve
picked about the lowest standard you can…but we need
to be careful about hindsight ethics. Yes, we have problems,
but overall the situation is not so dramatically different
than what we’ve seen in every post-boom era.”
Zell called for “clarity” and
reform in the accounting industry, and defined that reform
in a straightforward way: “Tell the truth!”
He also placed some of the responsibility
for the current crisis with the public, who he said failed
to exercise proper judgment with regard to their investments.
“The S&P 500 grew at nearly 20
percent per year for five years in the 1990s,” said
Zell. “If you didn’t know the books were being
cooked all you needed to do was look at the growth numbers.”
Citing the example of WorldCom, an incredulous
Zell asked, “Who in their right mind would buy WorldCom
stock when its CEO borrowed $400 million from the company?”
Zell summed up the accounting crisis by saying
that the corporate world must return to disciplined financial
practices. “To me, it’s simple: Either you’re
in the game and you play it straight or you get out of the
General consensus, however, called for more
stern reform measures. That attitude was expressed by Turner.
“The American public is furious at
the corporate world today,” said the former SEC accountant.
“We need to find a rope and an oak tree and then hang
those culpable until they ripen.”